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Option Costs Weigh Down Yahoo Profit

The expense offsets solid advertising sales. The Internet giant says it has a plan to catch up with Google's search ads.

April 19, 2006|Chris Gaither | Times staff writer

Yahoo Inc. on Tuesday said first-quarter profit dived 22% as a stock compensation expense offset strong online advertising sales.

The Internet media giant reported net income of $160 million, or 11 cents a share, meeting Wall Street expectations. Profit during the comparable period last year was $205 million, or 14 cents a share.

Yahoo continued to lead the market for Internet banners and other brand-name advertising online, analysts said. Revenue jumped 34% to $1.6 billion.

Company executives also sought to allay fears that Yahoo's search engine was falling even further behind Google Inc.'s, saying they planned to introduce an advertising platform in the second half of the year that would produce more revenue-generating clicks on search ads.

"Yahoo continues to dominate in branded [advertising] and subscription revenue growth," said Laura Martin, a media analyst with Soleil-Fulcrum. But, she added, investors are focused on whether Yahoo can become more adept at getting people to click on money-generating search ads, a business in which Google has excelled.

Yahoo shares gained 33 cents to $31.30 before the earnings release, then rose 6% in after-hours trading to $33.20. The stock had fallen 23% since Jan. 17, when Yahoo's fourth-quarter earnings and 2006 forecast disappointed investors.

The 22% net income drop was out of character for fast-growing Yahoo but could be attributed entirely to a new accounting rule that requires companies to list stock options as an expense. Excluding the $71-million charge for stock options, Yahoo's profit rose 19% to $231 million.

Goldman Sachs analyst Anthony Noto said the results showed "very stable growth" in Yahoo's core advertising business.

Search is still the hottest segment of the online advertising market, and Google, which reports first-quarter earnings Thursday, appears to be widening its lead. Google in March gained search-engine share for the eighth consecutive month, with 42.7% of all U.S. Web searches, up from 36.4% a year before, according to ComScore Networks. Yahoo was second with 28%, down from 30.6%.

Yahoo Chief Financial Officer Sue Decker disputed the ComScore report, saying Yahoo users performed 15% to 20% more search queries in the first quarter than during the same period last year. She also said the new search advertising platform Yahoo planned to introduce should start boosting profit in 2007.

"They do need to bridge some of the gap with Google because Google has run away with the market at this point," said Steve Biggs, a senior analyst with Zacks Investment Research.

Another competitor has caught the attention of analysts. During a conference call with Yahoo executives, Citigroup analyst Mark Mahaney asked how Yahoo was handling the threat posed by MySpace.com, the News Corp. property that has exploded in popularity, especially among teenagers.

Decker said Yahoo already had many of the features that made MySpace popular, such as tools for sharing opinions and media. But she also sought to put Yahoo's scale in perspective, noting that Yahoo surpassed the half-billion registered user threshold during the quarter.

Yahoo has added 50 million in the last six months, she said, which is only slightly fewer users than MySpace has overall.

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